Aptiv PLC (APTV) Earnings Call Transcript

All right. Hello, everybody, and thank you for joining us for this session with Aptiv as part of Deutsche Bank's Global Automotive Conference. My name is Emmanuel Rosner, and I'm the senior U.S. autos and technology analyst at Deutsche Bank. Aptiv is a leading global supplier that develop solutions to make vehicles safer, greener and more connected with a focus on signal and power distribution, connected vehicle, ADAS and user experience. The company is also working alongside Hyundai through its Motional JV to bring autonomous driving solution to the market in the coming years. And I'm very pleased to be joined this morning by Joe Massaro, who's CFO and SVP of Business Operations; and Elena Rosman, who's VP of Investor Relations, to discuss some of the latest updates, latest industry and company trends, as well as the longer-term view and outlook. So thank you so much for being with us.

Thanks for having us, Emmanuel. Appreciate it. Good to see you.

Great seeing you. And so the format of this session will be fireside chat around some of my prepared questions, but also questions from all of you on the call. [Operator Instructions]. So with that, let's dive right in.

Maybe starting with some of the current conditions you're facing in the industry. How has the impact from the semiconductor shortage progressed so far this quarter versus maybe your previous expectation? And what's your view of timing and trajectory to maybe more normalized condition?

Sure. No, that's a good place to start. So if you recall at the time of our earnings call, we really spoke about what I'll broadly describe as the chip constraint and really having sort of 3 root causes: The original COVID-related constraint where just I think the semiconductor industry in a lot of ways was expecting more of U-shaped recovery in auto despite what ourselves, our customers, other Tier 1s were telling them and got caught short for parts. That original constraint, our estimation, cost the industry about 1.5 million units in Q1 and we were estimating 500,000 to 600,000 units in Q2. So some sequential improvement there. And that is playing out as expected. We then had the Renesas fire at the Naka facility in late March. We had Texas weather shut down several major semiconductor fabs in Texas in late February. And those really created supply air pockets. When a fab comes offline for whatever reason, it's not necessarily parts the following Monday that fall short, it's really the impact on their work-in-process inventory and you can sort of look out and say, okay, there's an air pocket coming at some point in the future. We're in the middle of that now. We expected that air pocket to really hit in late May and June, possibly go into early July. I would say the industry is in the midst of that now, particularly with the Naka fire from Renesas. It's just a -- it's significantly disruptive. We estimated that, that disruption alone could be worth 2 million units in Q2 from the weather and the Naka fire. So that's a big number in a concentrated period of time. And again, seeing that sort of played out as expected. This is when we thought we'd be in sort of the height of it, and we certainly are. And when I say we, that's an industry comment and it's just not Aptiv. I think it's affecting really all of the OEs, all of the sort of I'll call sort of technology-based Tier 1s. The nice part about an air pocket or the nice part about an air pocket versus longer-term constraints is the WIP comes back online, the plants go up and running and at some point, you should be able to catch up. We really view that catch-up starting in the third quarter. Although I think it's safe to say there will be some level of chip tightness, chip constraint through the back half of the year and possibly into 2022 just given the demand set from the auto industry, as well as just really strong economic demand globally in other industries that require chips. But I don't think you'll have this acute impact of the Texas weather and the Renesas fire that we're currently working through now.

Okay, great. And I guess, best guess or best projection around LVP for the full year, still comfortable where you're at? And do you think some of these constraints could limit the amount of bounce back seen for the industry in 2022?

Listen, I think it's still a little bit too early to call 2022, obviously. For 2021, our view -- and we had the benefit of providing this number in January obviously when we were looking at the original constraint. Our view is global vehicle production, right around 84 million units. We certainly think there's a path to recover to that in the back half of the year for the industry. I think the -- as Kevin talked about on our earnings call, from our perspective, all of the positive tailwinds, the increase in content growth around EVs or around active safety, end consumer demand for vehicles globally, all of those remain in very strong shape. So really does seem to be a case of as we get chips, our customers have certainly -- and I think you probably heard comments from some of our larger customers very similar to this. When they have chips, they want to build the cars. The plan is to make up the volume now. How much of that gets made up in Q3, Q4 versus some of it in Q1 next year? I think it's still too early to decide that. But we're comfortable with our full year outlook and the 84 million units of production.

That's up 10% on an Aptiv-weighted basis for the year.

For the year-over-year. Yes.

Okay. And then maybe one last one on the current environment. So besides from this sort of indirect impact from shortages on industry production, I think you've also experienced some direct impacts around the supply chain bottlenecks and inefficiencies. The -- are you worried about some of -- I guess, how these are playing out, I guess now and this quarter and the rest of the year? And are you worried about some of these headwinds lingering, potentially higher cost of chips or other components going forward?

Yes. Listen, I think broadly speaking, you need to -- certainly someone in our company's position, my position as CFO, you need to be mindful about inflation. We're certainly working through our processes around efficiencies and how to make sure that as we look into 2022, we can offset as much of it as possible. One of the things we've done over -- for years now is try to position the business, from a structural perspective, to minimize these types of things, right, to the extent possible. So if you look at copper, which is by far our biggest commodity exposure, copper is at -- has touched record-high price, has retreated a bit here in the past week or 2. At the time of our earnings call, though, it was right around the 2011 price level, right, which was another period of time where the industry started to come back very strong and we saw copper get to those levels. So it's territory we've been at before. We've been here before. We've got contracts in place from a copper perspective where we passed through about 80% of our price increases. We've been able to hedge the majority of the remaining exposure. So structurally, we feel good about things like that. Copper for us will cause a bit of a margin rate distortion when the price moves up or down quickly because we're basically putting through 100% of the price change in both the top line and cost of sales. So there's no margin on those changes. But it's really a margin rate issue. It's not an economic loss. We've seen constraints around resin or around connectors at periods of time really since last fall. Those have been able to -- we're able to work through those a little bit more quickly than chips, primarily because you don't have the lead times that you do with semiconductor chips, right? You really are talking about some of the types of SoCs in devices that are used by auto really do have a 6-, 7-month manufacturing lead time. So it really does take a while to cook them. Where things like connectors, copper strips, to the extent they're tight, it's a little bit of a quicker or a much quicker recovery. So working through those, I would expect there to be some inflationary pressures going in on chips, going into resins into 2022. And those become commercial discussions with our customers, commercial discussions with the suppliers. And as we've done in the past, a lot of effort internally to increase manufacturing efficiency. I think design efficiency, particularly around some of these chips becomes important. How can you start to think about -- and we've got over 100 engineering projects ongoing now to talk about how best to redesign, either to replace chips or, in some cases, to have multiple alternatives, which help not only from a supply perspective, but in theory, a price perspective as well or a cost perspective.

Great. Great to hear. And we're seeing some investor questions here, but one of them I love in particular because it really ties the current conditions you described with questions around the longer-term outlook. Do you believe that the current copper inflation could lead to more interest or faster adoption of some of your Smart Vehicle Architecture for EVs? Does it lead OEMs to be more active there recently?

Listen, I think it's potentially another push, right? Even if you think about SVA, when you take down the number of domain controllers in a vehicle, in theory, you become less reliant on fewer chipsets as well. So there is -- any time you consolidate and make something more efficient, it requires less of certain components, and that's a positive. So I think it's probably an incremental push or benefit. But quite honestly, we're -- as we've talked about before, the drive to get to smarter vehicle architecture, to take mass out of the content -- to take mass out of the vehicle, for us, has been accelerating over the last couple of years. We're seeing a really good traction. Elena can speak to some of the activity we're seeing on zone controllers, which is really, to us, one of the precursors to getting to SVA, you just start to take some of the compute platforms down ahead of SVA. So you're moving to SVA with what is, in theory, a more simplified structure than maybe you had 4 or 5 years ago. And then, listen, this acceleration into EV, there's -- it really has renewed the interest around lightweighting. It has renewed -- they tend to be more software-enabled vehicles, higher technology content in those EVs, which makes the signal processing and signal efficiency a lot more important. So focus on newer materials like flex circuitry or ribbon cables, I think is -- which we always thought was part of SVA, we're seeing increased interest in. And then obviously, which we've done a great job within our business of just how you really get the high-voltage power into the vehicle most efficiently. So there's a lot of positive tailwinds there. I do think commodity constraint, commodity pricing is just one more helpful push on how to become more efficient. Do you want to touch on zone controllers real quick?

Yes. And maybe specific to the question, Emmanuel. And we'll be sharing some of these details at our upcoming electrification teach-in on June 28. But we have been very active with customers. We've done some studies looking at this evolutionary approach towards Smart Vehicle Architecture, sort of starting now with the application of smart electrical centers. That zone control really starts to take hold, call it, middle of the decade. One study we did recently with an OEM saves about 20% plus of the wiring weight shifting to that zonal architecture. So I think specific to your question on the opportunities there, it's significant. And then obviously, full SVA deployment saves in excess -- and we've talked about this before, CES in excess of 30% of the full wiring weight. And we see that rolling out kind of in that 2025 to 2030 time frame.

That's helpful. I guess the second part of the investor question was what should we expect in Zone Controller Awards over the next 18 months? And who are credible competitors here?

I'll take the competitor part, then you can think through the awards. For us, it's very much like we've talked about on our large complex Satellite Architecture systems for active safety. Our main competitor there is Bosch. They tend to be the ones with a -- they are good at large-scale software domain controllers. We compete very effectively against them. But we really see -- we really bump up against them the most in this type of -- with this type of technology.

I would add on zone control. So we're actually launching our first zone control with an award we had a little over 2 years ago, it will launch in 2022. I'd say from a pipeline perspective, a bookings pipeline, we have a number of pursuits that we're currently in discussions with. So you should hear more about that over the next, call it, 12 to 18 months. Again, we really think about full -- sorry, bigger deployments in that 2025 time frame. So to put some numbers behind that, we've talked -- the zone control, for us, is really a relatively new market. So what it's replacing, right, are individual body function ECUs that get -- are really being up-integrated into these, depending upon the topology and the structuring, 4 to 6 different zone controls spread around the vehicle. That will be about $1 billion market in 2025, growing to about $5 billion in 2030. And again, because Aptiv isn't a large player in this ECU market, a lot of that is incremental opportunity set for us over that time frame.

Great. That's great color. Maybe a few more questions on the near term, and then we'll go back to some of the technology and product trends. So the first quarter growth over market was in the mid-teens, but you guided for 6 points growth over the market for the full year, which is maybe just 3 points through the rest of the year. What were the main drivers of the outperformance in the first quarter? And what would drive this type of outcome over the rest of the year?

Yes. Listen, I think there's a couple of things specific to the first quarter. We obviously had strong performance. High-voltage growth was significant. We continue to benefit from some launch activity in China. About 4 points of that 15% growth was really related to what I'll call sort of channel replenishment in the engineered components business. So HellermannTyton and connectors, either into distribution or into Tier 1s, that is typically a very steady business. We don't go through a lot of replenishment depletion cycles in that business, but this was I think unique to COVID. We had forecasted that to happen during the year. We initially thought it would be more of a Q2, Q3 event, but started somewhat earlier. I think just given the strong rebound of vehicle production, you started to have the tiers and distribution effectively sort of getting back to prior levels. Again, anticipated -- and I don't expect that to change. I don't think this becomes a lumpy number going forward. I really do think this is a sort of post-COVID effect. Listen, our growth over market, we remain very confident in the 6% to 8% both for this year and as well as the long term. That's a range we're committed to and have delivered against almost regardless of what else is happening in the environment. I understand it's running a little higher. Quite honestly, we don't see anything. And Kevin and I have both made these comments before. We don't see anything in the back half of the year that has significant -- that would tell us that we're going to see significant reduction in growth over market. But at this point, just given the lack of visibility, particularly at the Q1 earnings call, the lack of guidance for Q2 or our ability to guide for Q2, really hard to update sort of any one particular part of the guide, right? So we remain very confident in the full year outlook, everything we talked about all the way back in early February. Certainly working now with our customers and will be into early July to get better forecast for the back half of the year. And I think we'll be obviously able to speak to sort of Q3 and the full year in more detail as part of the Q2 earnings call in August.

Great. And I guess, conversely, and the next question came in from an investor, given your customers increased move and more aggressive spending into EV and AV, obviously, GM increasing by another $8 billion, just yesterday they had a conference, and that -- Ford just a few weeks back. So is there an upward bias to your long-term growth over market framework?

Listen, again, we've focused on the 6% to 8%, and it's a long-term commitment to make sure that we can from -- on a long-term basis, cover both the ups and downs that naturally happen within the industry, right? For example, we've been into that 6% to 8% range even as we go -- even as we've run through a product transition over the last couple of years on infotainment and have exited the Displays business. So that's really a long-term guidepost. Certainly, from an HV perspective, I will admit high voltage, that business is running ahead of the expectations we initially had for at the Capital Markets Day in 2019. We'll be right around $900 million of revenue this year. We expect that business to continue to grow 50% to 60% per year. And if you recall, Emmanuel, our view was that about 80% of the opportunity, this is if you go back a year or maybe a little longer, 80% of the EV opportunity for the next 5 years was in China and Europe. And we thought North America at the time would be somewhat of a laggard just given consumer appetites around the larger SUV and trucks. Hadn't seen the types of announcements that we've seen recently from the North American OEs. So our 50% to 60% growth rate, our very strong bookings over the last couple of years for high voltage was really based on that 80% Europe-China opportunity. So to the extent you've got North America coming on much faster, we do think there's additional opportunities there for us in the mid to long-term on -- particularly on the high-voltage business.